Myths and falsehoods about the purported link between affordable housing initiatives and the financial crisis

Conservative and other media figures -- echoing a reported strategy on the part of Republicans -- have attempted to lay blame for the financial crisis on proponents of the expansion of affordable housing. Those attacks are premised on several myths and falsehoods.

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Conservative and other media figures, echoing a reported strategy on the part of Republicans, have attempted to deflect blame for the financial crisis onto proponents of the expansion of affordable housing and legislation and institutions created to effect that expansion.

Newsweek senior editor Daniel Gross wrote in an October 7 Slate commentary:

On the Republican side of Congress, in the right-wing financial media (which is to say the financial media), and in certain parts of the op-ed-o-sphere, there's a consensus emerging that the whole mess should be laid at the feet of Fannie Mae and Freddie Mac, the failed mortgage giants, and the Community Reinvestment Act, a law passed during the Carter administration. The CRA, which was amended in the 1990s and this decade, requires banks -- which had a long, distinguished history of notmaking loans to minorities -- to make more efforts to do so.

Recent attacks have turned personal, with conservative media -- along with congressional Republicans and Sen. John McCain -- targeting Rep. Barney Frank (D-MA) directly as a purported culprit in the financial crisis, falsely representing his decades-long advocacy of increased affordable housing as advocacy of lax oversight over Fannie and Freddie.

The attacks are premised on several myths and falsehoods and, in the case of CRA and attacks on minority lending, have taken on a racial tinge.

The roots of this crisis go back to the Carter administration. That was when government officials, egged on by left-wing activists, began accusing mortgage lenders of racism and "redlining" because urban blacks were being denied mortgages at a higher rate than suburban whites.

The pressure to make more loans to minorities (read: to borrowers with weak credit histories) became relentless. Congress passed the Community Reinvestment Act, empowering regulators to punish banks that failed to 'meet the credit needs' of 'low-income, minority, and distressed neighborhoods.' Lenders responded by loosening their underwriting standards and making increasingly shoddy loans."

Jacoby is not alone in his reference to "minority" lending. On the September 18 edition of Fox News' Your World, host Neil Cavuto asked Rep. Xavier Becerra (D-CA), "[W]hen you and many of your colleagues were pushing for more minority lending and more expanded lending to folks who heretofore couldn't get mortgages, when you were pushing homeownership ... Are you totally without culpability here?" Cavuto later said, "I'm just saying, I don't remember a clarion call that said, 'Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster.' "

But the suggestion that the financial crisis was caused by banks lending irresponsibly to comply with the CRA is widely discredited. According to housing experts, a large number of subprime loans were not made under the CRA, which applies only to depository institutions. A study released earlier this year by a law firm specializing in CRA compliance estimated that in the 15 most populous metropolitan areas, 84.3 percent of subprime loans in 2006 were made by financial institutions not governed by the CRA. Moreover, Janet Yellen, president and CEO of the Federal Reserve Bank of San Francisco, stated in a March 2008 speech that "studies have shown that the CRA has increased the volume of responsible lending to low- and moderate-income households" [emphasis added].

In testimony before the House Financial Services Committee, University of Michigan law professor Michael Barr stated:

Despite the fact that CRA appears to have increased bank and thrift lending in low- and moderate-income communities, such institutions are not the only ones operating in these areas. In fact, with new and lower-cost sources of funding available from the secondary market through securitization, and with advances in financial technology, subprime lending exploded in the late 1990s, reaching over $600 billion and 20% of all originations by 2005. More than half of subprime loans were made by independent mortgage companies not subject to comprehensive federal supervision; another 30 percent of such originations were made by affiliates of banks or thrifts, which are not subject to routine examination or supervision, and the remaining 20 percent were made by banks and thrifts. Although reasonable people can disagree about how to interpret the evidence, my own judgment is that the worst and most widespread abuses occurred in the institutions with the least federal oversight.

The housing crisis we face today, driven by serious problems in the subprime lending, suggests that our system of home mortgage regulation, including CRA, is seriously deficient. We need to fill what my friend, the late Federal Reserve Board Governor Ned Gramlich aptly termed, "the giant hole in the supervisory safety net." Banks and thrifts are subject to comprehensive federal regulation and supervision; their affiliates far less so; and independent mortgage companies, not at all. Moreover, many market-based systems designed to ensure sound practices in this sector-broker reputational risk, lender oversight of brokers, investor oversight of lenders, rating agency oversight of securitizations, and so on -- simply did not work. Conflicts of interest, lax regulation, and "boom times" covered up the extent of the abuses -- at least for a while, at least for those not directly affected by abusive practices. But no more.

Others who have advanced this or similar claims include guest Jonathan Hoenig during the September 25 edition of The Radio Factor with Bill O'Reilly, radio host Laura Ingraham during the September 25 edition of Fox News' The O'Reilly Factor, and a September 25 Investor's Business Dailyeditorial claiming that the CRA "forced banks to make many more subprime loans."

MYTH: Excessive lending to undocumented immigrants is responsible for the financial crisis

On the October 9 edition of CNN's Lou Dobbs Tonight, San Diego radio host Roger Hedgecock claimed that "[w]e have a situation where today HUD [the Department of Housing and Urban Development] was talking about 5 million illegal alien home mortgage loans that have gone bad." Radio host Joe Madison responded, "You see, this really angers me, because I'm sitting here ... and wondering, how is it that people who are illegal get loans when people in my community who are legal have a difficulty getting loans, and if they do get them, they're often from predators?" Neither Hedgecock nor Madison cited a source for the purported HUD statistic. On October 9, the Drudge Report linked to an article on the Phoenix radio station KFYI website under the headline, "HUD: Five Million Fraudulent Mortgages Held by Illegals..." However, according to an October 9 Phoenix Business Journalarticle posted at 3:15 pm MT (more than an hour before Lou Dobbs Tonight aired), HUD "says there is no basis to news reports that more than 5 million bad mortgages are held by illegal immigrants" and "a HUD spokesman said ... his agency has no data showing the number of illegal immigrants holding foreclosed or bad mortgages."

Other media figures advancing the claim that lending to undocumented immigrants is responsible for the mortgage crisis include syndicated columnist Michelle Malkin, who wrote in her September 24 column that "there's one giant paternal elephant in the room that has slipped notice: How illegal immigration, crime-enabling banks, and open-borders Bush policies fueled the mortgage crisis.

In a September 18 column, Fox News host Bill O'Reilly falsely claimed that Frank "sat by as mortgage brokers Fannie Mae and Freddie Mac made bad loans" and asserted that "[i]nstead of demanding responsible business practices from Fannie and Freddie, Frank continued to pound the table to extend even more credit to 'low income' families." In fact, Frank did not "s[i]t by." Frank's efforts to enhance regulatory oversight on Fannie Mae and Freddie Mac include:

In 2005, Frank, then the ranking Democrat on the House Financial Services Committee, worked with committee chairman Rep. Michael Oxley (R-OH) on the Federal Housing Finance Reform Act of 2005, which would have established the Federal Housing Finance Agency (FHFA) to replace the Office of Federal Housing Enterprise Oversight (OFHEO) as overseer of the activities of Fannie Mae and Freddie Mac. After voting for the bill in committee, Frank voted against final passage of the bill on the House floor, stating that he was doing so because an amendment to the bill on the House floor imposed restrictions on the kinds of nonprofit organizations that could receive funding under the bill.

In early 2007, as chairman of the House Financial Services Committee, Frank sponsoredH.R. 1427, a bill to create the FHFA, granting that agency "general supervisory and regulatory authority over" Fannie Mae and Freddie Mac, and directing it to reform the companies' business practices and regulate their exposure to credit and market risk. Among other things, Frank's legislation, titled the "Federal Housing Finance Reform Act of 2007," directed the FHFA director to "ensure" that Fannie Mae and Freddie Mac "operate[] in a safe and sound manner, including maintenance of adequate capital and internal controls" and to establish standards for "management of credit and counterparty risk" and "management of market risk." The FHFA was eventually created after Congress incorporated provisions that House Speaker Nancy Pelosi (D-CA) said were "similar" to those of H.R. 1427 into the Housing and Economic Recovery Act of 2008, which the president signed into law on July 30.

Some in the conservative media have taken the charge further, suggesting that in the 1990s, Frank allowed his relationship with Fannie Mae executive Herb Moses to affect his responsibility as a senior member of the House Financial Services Committee to conduct oversight over Fannie Mae. For example, in an October 3 article, Fox News deputy Washington Managing editor Bill Sammon asserted, in a charge he later echoed on Fox News' The O'Reilly Factor, "Unqualified home buyers were not the only ones who benefitted from Massachusetts Rep. Barney Frank's efforts to deregulate Fannie Mae throughout the 1990s. So did Frank's partner, a Fannie Mae executive at the forefront of the agency's push to relax lending restrictions."

In his article, however, Sammon cited only two sources: an anonymous Republican congressional staffer and Dan Gainor, who, Sammon did not note, is an employee of the conservative Media Research Center. Moreover, Sammon misrepresented Frank's record by reporting in his article that Frank "spent years blocking GOP lawmakers from imposing tougher regulations" on Fannie Mae and Freddie Mac. Sammon did not note in his article or during an October 6 appearance on The O'Reilly Factor that in the early 1990s, while Frank's Democratic Party still held the majority in Congress, and while Moses was at Fannie Mae, Frank supported bills to increase regulation of Fannie Mae and create a government regulatory agency that would supervise and have authority over some aspects of the company:

On September 30, 1991, Frank voted for a bill to create a new regulatory agency to oversee Fannie and Freddie that would have "[r]equire[d] the [agency's] Director to establish by regulation a risk-based capital test for the enterprises," "[r]equire[d] the Director to establish risk-based capital levels for each enterprise according to statutory guidelines," "[e]stablishe[d] minimum capital levels, critical capital levels, and enforcement levels," and "[s]et[] forth mandatory supervisory actions for the enterprises at various capital levels, including mandatory conservatorship."

In October 1992, Frank voted for the Housing and Community Development Act of 1992, creating OFHEO, which was tasked with "ensur[ing] that Fannie Mae and Freddie Mac (the enterprises) and their affiliates are adequately capitalized and operating safely." As with the bill Frank voted for in September 1991, the new law gave OFHEO authority to set, monitor, and enforce risk-based capital requirements for Fannie and Freddie.

Neal Boortz also advanced this claim about Frank and his former partner during the October 8 edition of his nationally syndicated radio show. On October 8, The Wall Street Journalreported that "[a] conservative political organization will begin airing nationwide TV advertisements Wednesday that criticize congressional Democrats for their ties to mortgage giants Freddie Mac and Fannie Mae."

MYTH: Fannie Mae and Freddie Mac caused the "current financial mess"

In a September 19 Huffington Post blog post, Center for American Progress senior fellow David Abramowitz wrote:

"There must be a Republican playbook circulating widely with a chapter entitled, 'What to say if asked who's to blame for the foreclosure mess.' Because an awful lot of Republican candidates are all suddenly yelling 'Fannie Mae, Fannie Mae, Fannie Mae' whenever plunging home prices and the housing crisis comes up. [...] So their plan seems to be to chant Fannie Mae often and loudly enough, and hope the public will get confused about who really caused this huge national calamity. It is always a good political story to just blame a bad guy who has something to do with the same topic.

Indeed, during the September 24 edition of Fox News' Special Report,host Brit Hume said, "Many financial analysts are saying that if mortgage giants Fannie Mae and Freddie Mac had been effectively regulated years ago, the supercharged subprime mortgage meltdown that led to the current financial mess would either never have happened or would have been nowhere near as severe." But rebutting the suggestion that the subprime mortgage purchasing activities of Fannie Mae and Freddie Mac caused the "current financial mess," economist Dean Baker recently stated:

Fannie and Freddie got into subprime junk and helped fuel the housing bubble, but they were trailing the irrational exuberance of the private sector. They lost market share in the years 2002-2007, as the volume of private issue mortgage backed securities exploded. In short, while Fannie and Freddie were completely irresponsible in their lending practices, the claim that they were responsible for the financial disaster is absurd on its face -- kind of like the claim that the earth is flat.

Indeed, in a 2006 Securities and Exchange Commission filing (available here) covering its activities in 2004, Fannie Mae stated: "We did not participate in large amounts of these non-traditional mortgages in 2004 and 2005." In the report, Fannie Mae also noted the growth of subprime lending and reported, "These trends and our decision not to participate in large amounts of these non-traditional mortgages contributed to a significant loss in our share of new single-family mortgage-related securities issuances to private-label issuers during this period."

Gross wrote in Slate that Fannie Mae and Freddie Mac were an "integral part" of a "culture of stupid, reckless lending." But, he wrote, they are not the primary culprits in the current financial crisis. He wrote:

Investment banks created a demand for subprime loans because they saw it as a new asset class that they could dominate. They made subprime loans for the same reason they made other loans: They could get paid for making the loans, for turning them into securities, and for trading them-frequently using borrowed capital.

As an example, he noted that the following happened during testimony by Lehman Brothers CEO Richard Fuld before the House Committee on Oversight and Government Reform:

At Monday's hearing, Rep. John Mica, R-Fla., gamely tried to pin Lehman's demise on Fannie and Freddie. After comparing Lehman's small political contributions with Fannie and Freddie's much larger ones, Mica asked Fuld what role Fannie and Freddie's failure played in Lehman's demise. Fuld's response: "De minimis."

From Fuld's testimony:

MICA: And one of your big com -- well, one of the big packagers, or the competitor, so to speak, was Fannie Mae, which was deep into this. And you were -- you were dealing in some of the paper, I think, for secondary markets and other securitized mortgage paper, to basically package it and make money off it. Is that right?

FULD: Yes, sir.

MICA: What was Lehman Brothers' exposure to the debt of Fannie Mae and Freddie Mac, and what role did their collapse play in precipitating some of your financial troubles?

FULD: Our --

MICA: It didn't matter or you --

FULD: Our exposure to both Fannie Mae and Freddie Mac was de minimis, sir.

MYTH: Sen. Barack Obama's campaign has significantly more ties to Fannie Mae and Freddie Mac than does John McCain's

In articles about the presidential candidates' responses to the economic crisis, the Associated Press, the Milwaukee Journal Sentinel, the San Francisco Chronicle, and The Washington Post reported that the McCain campaign criticized Sen. Barack Obama for, in the words of McCain spokesman Tucker Bounds, "his ties to spiraling lenders like Fannie Mae, Freddie Mac and their jet-set CEOs." But those articles did not note that several senior McCain campaign aides have served as lobbyists for Fannie Mae, Freddie Mac, or both. According to a Media Matters for Americasearch of the Senate Office of Public Records' Lobbying Disclosure Act Database, they include:

Political adviser Charlie Black, who lobbied for Freddie Mac from 1999 to 2004;

National finance co-chairman Wayne Berman, who lobbied for Fannie Mae from 2004 to 2008 and for Freddie Mac in 2004;

Congressional liaison John Green, who lobbied for Fannie Mae from 2004 to 2007 and for Freddie Mac in 2003;

William E. Timmons Sr., who reportedly "has been tapped by the McCain campaign to conduct a study in preparation for the presidential transition," lobbied for Freddie Mac from 2000 to 2008.

Additionally, severalmediaoutlets have reported that McCain campaign manager Rick Davis previously served as president of the Homeownership Alliance, a Washington-based advocacy group whose founding members included Fannie Mae and Freddie Mac, which Media Matters has noted.

On the September 29 edition of CNN's Lou Dobbs Tonight, host Lou Dobbs claimed: "ACORN [Association of Community Organizations for Reform Now] stands to reap hundreds of millions of dollars from a government bailout of Wall Street." Dobbs added later: "This is a straightforward deal for ACORN and other groups, left-wing groups, set up by the Democratic leadership of Congress. They're not interested in the bailout per se. They want to spread this out, and many people believe that this bailout in part is dear to the Democratic leadership because they want to advance a social agenda here as much as much as an economic bailout of Wall Street." Numerous other media figures also reported the false claim that Democrats were trying to steer money to ACORN. In fact, neither the draft proposal nor the final version of the bill contained any language mentioning ACORN. Those making the false claim were misrepresenting a provision -- since removed -- that would have directed 20 percent of any profits realized on troubled assets purchased under the plan into two previously established funds: the Housing Trust Fund and the Capital Magnet Fund, which, under the law authorizing them, distribute funds through state block grants and through competitive application processes, respectively.

On the October 9 edition of Fox News' Hannity & Colmes, Wall Street Journal columnist John Fund similarly made the false claim that ACORN "almost got a slush fund in the housing bailout bill a few weeks ago."

MYTH: Former President Clinton has blamed Democrats for the financial crisis

In a September 30 post on Time.com's Swampland blog, Washington bureau chief Jay Carney claimed that comments former President Bill Clinton made during a September 25 interview on ABC's Good Morning America that were subsequently featured in a McCain campaign ad "could undercut Democratic arguments that Bush and the Republicans are primarily responsible" for the financial crisis. During that interview, Clinton said, "I think the responsibility that the Democrats have may rest more in resisting any efforts by Republicans in the Congress or by me when I was president to put some standards and tighten up a little on Fannie Mae and Freddie Mac." But in reporting on the ad, Carney failed to point out that in the very same interview, Clinton also said, "I think the biggest mistake, by the way, that contributed to the current circumstance that almost nobody talks about, is the repeal after decades of something called the uptick rule, which allowed the hedge funds, heavily leveraged, and others to just drive down the market without any kind of automatic stoppers." In a separate interview aired that day with Matt Lauer, co-host of NBC's Today, Clinton stated of the financial situation: "[T]his thing really took off when the SEC, under this administration, exercised less oversight and they got rid of something called the uptick rule, which enabled betting down on housing stocks to go crazy."

The uptick rule, which was created in 1938, was a securities trading rule that regulated market short selling, the act of selling a stock that an investor does not own (but borrows from a broker or someone else) in anticipation that the stock's price will decrease. After a June 13, 2007, decision that became effective July 3, 2007, the SEC issued a final rule that repealed the uptick rule.

From C-SPAN's October 6 coverage of the House Oversight Reform Committee:

MICA: Again, you -- when you opened your statement, you said that Lehman Brothers -- and it was around for what, 150 years -- dealt in some pretty hard assets and some secure investments. You've been around a while. What turned the corner for you to get into some of the more speculative ventures, like subprime and some of the other, again, riskier investments?

FULD: As I said in my verbal testimony, our participation in the mortgage-related businesses was clearly a natural for us, given our dominance in fixed income. That was something that went back a number of years.

And even as I listened, as I say, to the panel before me, they correctly pointed out that this was a goal of the government to provide funding and mortgages to a number of people that typically would not or could not have received a mortgage.

MICA: And one of your big com -- well, one of the big packagers, or the competitor, so to speak, was Fannie Mae, which was deep into this. And you were -- you were dealing in some of the paper, I think, for secondary markets and other securitized mortgage paper, to basically package it and make money off it. Is that right?

FULD: Yes, sir.

MICA: What was Lehman Brothers' exposure to the debt of Fannie Mae and Freddie Mac, and what role did their collapse play in precipitating some of your financial troubles?

FULD: Our --

MICA: It didn't matter or you --

FULD: Our exposure to both Fannie Mae and Freddie Mac was de minimis, sir.

MICA: OK, but their collapse -- did that help precipitate any problems with your firm?

FULD: It certainly set the stage for an environment, as I talked about loss of confidence and credit-crisis mentality that permeated our market, clearly set the stage for investors losing confidence, counterparties asking for additional collateral, and clearly an environment that lost liquidity --

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